On 12 May 2021, the Supreme Court of the Czech Republic issued a decision under Case No. 27 Cdo 3549/2020 (hereinafter the “decision“), which deals with the necessary certainty of the registration of the business activity (scope of business) in the Commercial Register.
The common practice until the issuance of this decision was that business corporations entered the business activity (scope of business) in the Commercial Register in the wording “production, trade and services not included in Annexes 1 to 3 of the Trade Licensing Act” and this was also stated in the memorandum or articles of association. However, the Supreme Court ruled that this practice is contrary to the applicable legislation due to its lack of certainty.
Business activity (scope of business)
The business activity (scope of business) of a business corporation is one of the obligatory contents of the memorandum of association (articles of association) and is also a fact entered in the Commercial Register.
The purpose of the provisions of the memorandum of association (articles of association) on the business activity (scope of business) of the corporation is to ensure that the corporation performs exclusively the activities that its shareholders or members have designated. In this way, the members generally exercise the right to decide on the basic direction of the business corporation. In the event of a change in the business activity (scope of business) in a business corporation, it is necessary to proceed by amending the relevant provisions of its memorandum of association (articles of association).
The memorandum of association (articles of association) is a public document which is attached to the proposal when registering the business activity (scope of business). The registration court, when assessing the merits of the application for registration in the public register, then interprets the document submitted in order to determine whether the information to be registered is apparent from it.
Licensed Trades
The public law conditions for trade business are regulated by Act No. 455/1991 Coll. on Trade Business (hereinafter the “Trade Business Act“). These conditions contain the prerequisites that a person must fulfil in order to be granted a public law licence to conduct a trade.
In order to obtain any trade licence, a person must always fulfil the general conditions of business defined in Section 6 of the Trade Licensing Act. In cases of craft trades and bound trades, and in cases of licensed trades, it is also necessary to meet the special conditions specified in the Trade Licensing Act for each case. It is sufficient to fulfil only the general conditions in the case of an unqualified trade, which is defined negatively in Section 25 of the Trade Licensing Act. The unqualified trade includes an unlimited range of activities – everything that is not included in other trades is therefore included in it.
According to the decision of the Supreme Court, the systematics of the Trade Licensing Act has no significance in defining the business activity (scope of business) in the memorandum of association (articles of association). The business activity (scope of business) does not have to correspond literally to the definition of individual trades according to the Trade Licensing Act, it may be defined differently. It is then up to the trade licensing authority to classify the business activity defined in the articles of association under the relevant trade specified in the Trade Licensing Act and to determine whether the general conditions of business (in cases where the trade is an unqualified trade) are sufficient for the object of business so defined, or whether it is a bound, craft or licensed trade and the company must also fulfil other conditions specified by law.
Requirement for certainty of business activity (scope of business)
According to the decision of the Supreme Court, the provision of the memorandum of association (articles of association), according to which the subject of business of the business corporation is “production, trade and services not included in Annexes 1 to 3 of the Trade Licensing Act” does not meet the requirement of certainty, because it is not obvious from it what business activity (scope of business) of the given company is, and the corresponding result cannot be obtained even by interpretation.
The fields of activity of the unqualified trade, which is referred to as “production, trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act” are listed in Annex 4 of the Trade Licensing Act and contain a total of 82 different fields of activity, including the so-called residual category in point 82, which is referred to as production, trade and services not elsewhere classified. According to the reasoning of the Supreme Court, it cannot be interpreted as meaning that in this case the company’s business activity would include all the fields of activity in Annex No. 4 of the Trade Licensing Act under items 1 to 81, because no reasonable person in the position of member of a corporation could infer that it was the will of the members to engage in all the expressly enumerated activities and, at the same time, because the business activity so defined also refers to item 82 of Annex 4 of the Trade Licensing Act, and thus it is agreed that the business activity will be an undefined range of activities.
Indeterminate designation of the business activity (scope of business) and possible consequences
According to the Supreme Court’s decision, the business activity (scope of business) of the business corporation, defined by the memorandum of association (articles of association) as “production, trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act”, is therefore contrary to the applicable legislation and, due to the vagueness of its content, it is an apparent arrangement pursuant to Section 553 of Act No. 89/2012 Coll., the Civil Code (hereinafter the “Civil Code“), which is disregarded pursuant to Section 544 of the Civil Code. On the basis of such wording of the memorandum of association (articles of association), it is therefore not possible to register the subject of business in the Commercial Register.
It follows from the above that pursuant to Section 25 (1) (b) of Act No. 304/2012 Coll. on Public Registers of Legal Entities and Natural Persons (hereinafter the “Public Registers Act“), the business activity (scope of business) of a business corporation is entered in the Commercial Register, not the designation of the trade.
Therefore, in the case of the unqualified trade, the shareholders or members of a business corporation should specify in the memorandum of association (articles of association) the company’s business activity (scope of business) that corresponds to the reality, usually by listing some of the fields of activity listed in Annex 4 of the Trade Licensing Act. These will then be entered in the Commercial Register as the business activity (scope of business) of the business corporation.
If the memorandum of association (articles of association) states and, if applicable is entered in the commercial register the business activity (scope of business) as “production, trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act”, this entry contravenes Section 25 (1) (b) of the Public Registers Act and should be corrected.
As this is a public register entry which contravenes a mandatory provision of the Act, redress will be sought in accordance with section 9 (1) of the Public Registers Act. If it is not possible to achieve the remedy in another way, the registration court shall call upon the registered person to remedy the situation and if the legal entity fails to remedy the situation within the specified period, the court may, even without a petition, if such procedure is in the interest of the protection of third parties, decide to dissolve the legal entity with liquidation.
Conclusion
The decision of the Supreme Court under Case No. 27 Cdo 3549/2020 confirmed that the business activity (scope of business) of a business corporation should correspond to the reality, which for many business corporations, which currently have their business activity (scope of business) determined ambiguously, will mean a necessary change in the memorandum of association (articles of association) and a subsequent change in the Commercial Register.
If your business corporation has its business activity (scope of business) registered in the Commercial Register in the wording “production, trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act” or in another vague wording, we recommend you to follow the decision of the Supreme Court and as soon as possible to arrange a remedy by amending the memorandum of association (articles of association) and subsequently change the business activity (scope of business) in the Commercial Register, so that in the extreme case (after not meeting the deadline set by the registration court) the business corporation is not dissolved with liquidation.
In case of any questions concerning the certainty of the business activity (scope of business) of business corporations or in case of need of legal assistance in the amendment of the memorandum of association (articles of association) of a business company and registration in the Commercial Register, we are at your disposal. Do not hesitate to contact us.
Mgr. Jakub Málek, partner – malek@plegal.cz
Kateřina Roučková, legal assistant – rouckova@plegal.cz
17. 06. 2021